RD and SIP are the two most popular savings plans among investors which lets them fulfil their long-term financial goals. Recurring Deposit (RD) is an investment which usually is done in banks and NBFCs, whereas a Systematic Investment Plan (SIP) is planned on mutual funds. Here are essential aspects of these investment options which you need to know before investing in it:
An RD is a savings scheme where you invest a fixed amount each month for a predefined time, from which you will earn some fixed returns on a specified interest basis. The interest rates of recurring deposit are almost as high as that of fixed deposits. Also, it doesn’t depend on the market for its returns, so it is one of the safest investment options.
The recurring deposit investment tenure ranges from 6 months to a maximum of 10 years, which you can choose depending upon your needs. When you want a perfect short-term or long-term investment, then an RD is the best option which is risk-free with good returns.
Systematic Investment Plan:
SIP is an investment type where you invest in mutual funds which involves a regular amount of invested at predefined intervals. The frequency at which you invest can be chosen upon your decision which can be from daily to an annual basis. When you are looking for high returns and can tolerate high risk, then you should opt for SIP for your investment goals.
Which Is Better Systematic Investment Plan Or Recurring Deposit?
Here are specific points which you should know when you want to find out which is better to invest in SIP or RD:
The returns which you get from the recurring deposit are fixed and are depending upon the interest rate at which you agreed to have it at the time of investment. Mostly the fixed deposit will be the same as that of a fixed deposit, and both won’t be affected by market fluctuations for their returns.
Whereas with SIP being invested in mutual funds will not be fixed as it is linked to the market for its interest rate, and it will fluctuate depending on the market changes. When the underlying securities in mutual funds are doing well, then the returns will be higher.
As SIP is linked to the market for its profits, you can never be sure about its performances, so it is always at risk. When the market becomes low, then your investment goes along with it, and when it is high, it goes along with it, so loss or gain is on your hand. Whereas when you consider RD the returns don’t depend on the market, also the profits will be fixed, which makes RD less risker than SIP as an investment option.
Frequency Of Payments:
The investment on recurring deposit will take place every month, whereas when you consider a SIP, the frequency depends on your wish. You can either do it daily, weekly, monthly, quarterly, semi-annually or annually. The flexibility of choosing the investment frequency makes SIP preferred choice for those who are willing to take the risk on their investment.
Investment Objective and Horizon:
Depending upon your objective and horizon you choose between investing in recurring deposit or systematic investment plan. When your investment horizon is short, like around 1 to 4 years, then RD will be the best choice for you.
Whereas if you want to invest for more than five years, then it is best to choose SIP as mutual funds will become less risky on long terms, and you will also be able to get higher returns. When you have short-term goals, then RD or with long-term goals on wealth creation, it will be SIP.
The interest which you earn on your recurring deposit will be added to your taxable income and will be taxed as per your salary slab. Whereas when you consider SIP taxation, it depends upon the scheme you choose. There are short term capital gains tax and long term capital gains tax, which as per the holding periods differs for equity and debt funds.
Equity Linked Savings Scheme (ELSS) is one mutual fund’s scheme with which you can get a tax deduction till Rs.1.5 lakhs under Section 80C of the Indian Income Tax Act. But, when you want to get benefited from tax, then you should have at least invested in SIP for three years.
Benefits of SIP:
Here are certain advantages of SIP for further understanding:
The number of units which you want to invest in can change depending upon your needs. Many schemes don’t charge any fees when you redeem your investment at any time. When you want to liquidate your funds, you don’t have to burden yourself with a load like RDs where you have to pay the penalty for withdrawal.
You can be flexible with your investment and can cancel your subscription with particular mutual funds depending upon your situation. You can increase it as per your wish as well, and this flexibility is not in RDs.
Benefits of Compounding:
When you invest in mutual funds through SIP, the returns will be magnified with a compounding effect. Because you not only earn interest on your principal but also get the interest amount accrued and for the long run, this option will be the best.
Benefits of RD:
Here are certain advantages of RD for better understanding:
When you consider an RD, the returns are fixed and guaranteed as it doesn’t depend on the market for its interest rates. As per RBI guidelines, the interest rate remains the same throughout the tenure.
When your financial goal is on a short-term basis, then you can choose an RD. When you want a risk-free investment option, where you can get substantial wealth generation, then RD is the best choice at high interest rate for you.
When you have an RD, your bank will be automatically debiting the RD investment amount each month, which makes it easy for you. There won’t be much of a documentation work required as well as like SIP.
We can see that both SIP and RD are best in their ways, and it solely depends on the investor to choose among the investment. When you aren’t worried about taking a risk, you can select SIP, or you can play safe with an RD.